Thursday, March 31, 2016

Tax Advantages of Owning Real Estate

With April arriving at the end of this week, tax season is officially upon us. I know most of you view taxes as a dry subject that isn’t particularly exciting. That being said, there is one element of the subject that always gets people excited - paying less taxes!

There are many tax advantages to owning and investing in real estate. Although we aren’t accountants, and would defer any specific question regarding your tax situation to a professional, there are a few broad tax advantages that you should all be aware of.

So without further ado:
  1. Capital gains on a principal residence are tax free. So say your one of those lucky Vancouver home owners who bought their house 30 years ago for $100,000 and are now selling it for $3,500,000, those proceeds are your tax free. There are some complications if you also own a vacation home and are unsure which property is your “principal residence”. You may also have a hard time with CRA if you are a contractor and buy and sell your principle residence for profit multiple times. Talk with your accountant about some of these scenarios.
  2. Financing costs related to an income property are tax deductible. The general rule is, if you're borrowing money to invest to make income, the interest costs with that borrowed money are tax deductible. For example, if you buy a duplex for rental income, and get a mortgage at 3% interest, and you are in a 40% tax bracket, your after tax cost of borrowing becomes only 1.8% ((3%*(1-0.4)). This makes your return on cash invested potentially very attractive.
  3. Depreciation can be claimed as an expense against rental income. You are able to depreciate the value of the property every year (usually up to 4% of the value of the building), which will lower your taxable rental income in that year. So for example, if you had a property with $10,000 of taxable income, and property with a book value of $200,000, you could claim a depreciation expense of $8000 ($200,000*4%), lowering your taxable income to $2,000 for that year. This basically acts as a tax deferral, which can come in very handy in tax planning. Also note, that claiming this depreciation lowers your book value and will increase your capital gain down the line when you sell. This can be a complicated subject and should be discussed with your accountant.
  4. Properties can be owned in personal names or owned in holding corporations. Different ownership structures can provide different opportunities for tax planning and flexibility. Owning in a corporation can also have legal liability advantages. Again another subject to discuss with your accountant.
While this is far from an exhaustive list, these are some of the tax advantages related to real estate you should be aware of this tax season.

Are there any tax benefits you enjoy from your real estate ownership?

Russel Lalovich
Office: (519) 966-0444
Cell: (519) 995-5620

Wednesday, March 30, 2016

All You Need to Know About Your Options for Renewal

Congratulations… on having just closed and purchased a 6 unit commercial plaza and the management of it going forward. Your first order of business is to negotiate a RENEWAL with an existing tenant, with a term expiring 6 months out. It all begins with a look back at the Lease Agreement and a review of the RO it contains.

What’s INCLUDED in the RO? The key elements most often include the following:

  • A notice period of intention to renew (ie. 6 months) and typically in writing
  • Term – either specified as a fixed yearly term or possibly a range (ie. 3-5 years)
  • Rental Rate – in some cases as a pre-determined amount
  • To Be Negotiated – more often, at rates to be negotiated at the time of renewal
  • Rate Capping – even if rates are higher, capped at a certain threshold (ie. +5%)
  • Arbitration – a mechanism to establish a rate through a 3rd party if each side disagrees

BENEFITS – In actuality it is more important to the Tenant, as it protects their rights to the space and possibly their ability to negotiate in conditions which favour the Landlord. The more detailed the RO and specific based on future rates, the better for the Tenant in protecting their interests.

FUTURE RATES – this is the ‘Canary in the Coal Mine’ and where many a battle is waged. Landlords expect to achieve market rent at the time of renewal, and generally resist capping or fixing rates ahead of the renewal. Tenant’s on the other side - want cost certainty going forward on renewals and want to know they will not be faced with substantial rate increases in future terms. The option of ARBITRATION is a must to be included in any deal, to make sure a ‘fair market rent’ can be achieved at time of renewal. Keep in mind that Arbitration Hearings cost money, and it can be expensive to involve this 3rd party solution.

COSTS TO STAY OR GO? – For the Tenant - costs to relocate can be substantial, not to mention the disruption to business and your customer flow. For the Landlord – costs can include loss of income through a vacancy period, expenses to re-fit the unit for another tenant, and ultimately a hit to the return on the property.

Renewal options may not seem important (to either side) when you initially sign the initial lease. But clearly, it’s a future planning matter and you need to consider it carefully before finalizing your deal – and again, both Landlord and Tenant.

Just a click / call away from discussing our latest investments here in Windsor – Essex!

Mark Lalovich
Office: (519) 966-0444
Cell: (519) 259-5434

Tuesday, March 22, 2016

7 Tips For Improving Your Credit Score

This week we are going to wrap up our multi-week discussion on credit reports. Now that your are regularly checking your credit score, and have a better understanding of how your credit score is calculated, today it is only natural to discuss the ways in which you can improve your credit score.

This is not an exhaustive list, but a straightforward road to credit score improvements over time:
  1. Always make your payments on time. If you cannot pay the full amount, make at least the minimum payment. 
  2. If you think you will have trouble paying a bill, contact the lender right away. See if you can work out a special arrangement to repay your debt.
  3. Try to use less than 35 percent of your available credit. For example: if you have a credit card with a limit of $10,000, try to not have an outstanding balance of over $3,500 at any one time.
  4. Instead of closing an older account, consider leaving it open even if you no longer need to use it, especially if there is no annual fee. Use it from time to time to keep it active.
  5. Limit the number of times you apply for credit in a short period of time. It is a good idea to seek credit only when you really need it.
  6. Consider the use of a mortgage broker. As they run your credit report one time and use that to shop to different lenders. Shopping for a mortgage yourself to multiple lenders can result in multiple credit applications and a ding to your score.
  7. Having a mix of credit products could get you more points, but don’t go overboard. Make sure you can afford to pay back any money you borrow. Otherwise, you could end up hurting your score by taking on more debt than you can handle.
So there you have it. Follow this simple list and you’ll be on your way to a higher credit score in no time.

Have you used any of these strategies to improve your credit score?

Russel Lalovich
Office: (519) 966-0444
Cell: (519) 995-5620

Thursday, March 17, 2016

Understanding Your Credit Score

Since reading our recent posts (here and here) on credit scores, hopefully most of you are now in the habit of regularly checking your credit reports. Once you’ve had the chance to review it, you might have a few questions, even if you don’t notice any mistakes.

One question might be: how is my credit score calculated?

The formulas used for calculating your credit score are proprietary to the credit score companies (Equifax & Transunion in Canada), so they unfortunately are unavailable to the public. This makes it hard to know how your actions affect your scores.

That being said, there are 5 main factors that are used in calculations:

1) Payment History
This is the most important factor. It includes when you paid bills, missed payments, collection agency activity, and bankruptcy. Obviously, missing payments or being late often can damage your score.

2) Use of Available Credit
This is the second most important factor. To figure out your available credit, add up the credit limits for all your credit products, such as credit cards, lines of credit and other loans.
What counts toward your credit score is how much of your available credit you actually use, not your credit limits by themselves.
When you use a large percentage of your available credit, lenders see you as a greater risk, even if you pay your balance in full by the due date.

3) Length of Credit History
The longer you have had a credit account open, and used it, the better for your score. If all your credit facilities are relatively new, this can adversely affect your score.

4) Number of Credit Inquiries
When lenders and others ask a credit reporting agency for your credit report, it is recorded as an inquiry. This usually happens when you apply for credit. It is normal and expected to seek credit every so often. But if there are too many inquiries on your credit report, lenders may be concerned. It can seem like you are desperately seeking credit or that you are trying to live beyond your means without the ability to pay back the money you want to borrow.

5) Types of Credit
Your score may be lower if you only have one type of credit product, such as a credit card. It is better to have a mix of different types of credit, such as a credit card, auto loan, line of credit or other loan. It can even help if you have a second but different type of credit card, such as an account with a store.

This is a bit of a complex calculation, but by breaking it down into these 5 factors, it makes it easier to understand.

Have your noticed how your actions have made a difference on your credit scores?

Russel Lalovich
Office: (519) 966-0444
Cell: (519) 995-5620

Friday, March 11, 2016

6 Tips For Taking Over Income Property

So you are set to close on a property, containing multiple tenants which you are now assuming and responsible to. Here’s some ‘tips’ to ensure a smooth transition:

  1. Preferred Method of COMMUNICATION – simply what is the best means to connect with you to discuss a tenant matter and what is the expected response time. Do you prefer email, text or a call? Whichever it is – clarify the preferred means upfront.
  2. Preferred Method of PAYMENT – most common today are direct deposit or email transfer. But is cheque acceptable and how it is delivered (mail or pick-up)? All forms of payment may work, but lay out the expectations so all sides are clear.
  3. Arranging REPAIRS/MAINTENANCE – what do your tenants expect when a repair has to made? Can they be done during business hours and can tradespeople have easy access to the premises? Do you have an on-call list of trades people, for handling such repairs? More questions then answers - but it’s all about expectations and managing them on both sides.
  4. Preparing premises for NEW TENANTS – readying the space for a new tenant is often full of expectations that need to be met. What are your responsibilities on possession date? What is required of them at takeover? Will there be a walk-through on possession date and even a checklist report completed? Best practice, is to have a system and employ it. In the case of new tenants, you can also establish the groundrules.
  5. Understanding the BUSINESS OF EACH TENANT – beyond the lease agreement that you assumed, spend some time understanding the Tenant’s business and how it affects the overall property. Is it a quiet office environment vs. a busy retail operation? Does it draw considerable traffic (parking demand), and what sort of hours of operation are involved? Is it compatible with the neighbouring units? Are there operational issues which you may be assuming buy may have missed during your due diligence process?
  6. Keep Good TENANT FILES – not simply about keeping track of rent and expenses. Files should include all tenant communications, written notices, and future plans for the space (ie. expansion). Even if you did not assume good files at closing, make a habit of establishing a better system going forward.
The above should help to make a good first impression with your Tenants at closing. Again, it’s all about expectations --not only setting them, but managing them! Love to hear about any stories about problem takeovers, on past deals…

Just a click / call away from discussing our latest investment opportunities in Windsor-Essex.

Mark Lalovich
Office: (519) 966-0444
Cell: (519) 259-5434

Wednesday, March 9, 2016

How to Protect Yourself From Identity Theft

As one of us has been a victim of identity fraud, we can speak first hand about the experience. It is a very frustrating, time consuming process. The best way to deal with identity fraud is to do whatever you can to avoid it from happening in the first place. Today we are going to talk about how to protect yourself.

But first lets define Identity Fraud:

Identity fraud (or identity theft) happens when criminals steal your personal information, and use it to identify themselves as you. The thieves can then use this information to make requests or authorize transactions on your financial accounts. 

These transactions can include:
  • changing your address
  • taking out a new loan or a line of credit in your name
  • ordering an additional credit card
  • transferring funds or withdrawing money
Like we discussed last week, since identity fraud usually happens without your knowledge, it usually only comes to your attention when you go to apply for credit or the like that comes with a credit check.

Tips To Protect Yourself From Identity Theft
  • Put important identification (ID) in a safe place. This includes your Social Insurance Number, birth certificate, passport and any other cards or documents that show your personal details.
  • Before throwing them away, shred all documents that have your personal information (such as your name and address) on them—including old credit card statements or other old ID.
  • Share your personal information only with companies you know and trust. Don’t give out more than you need to.
  • Don’t leave personal information lying around at home, in your vehicle or at the office.
  • Keep your wallet or purse out of reach of other people—in crowds, in shopping malls and while on public transportation.
  • When making a purchase, keep your card in sight, and make sure that the card returned to you is yours.
  • Carry a minimum number of credit cards or other important personal information with you.
  • Lock your household mailbox if possible. It is common for thieves to look for credit card statements, new credit cards and credit card applications.
  • If you are going to be away, arrange for a trusted neighbour to pick up your mail. You can also go to your local post office (with identification) and ask for Canada Post’s Hold Mail service. There is a charge for this service.
  • Order a free copy of your credit report at least once a year from one of the two credit reporting agencies in Canada, TransUnion and Equifax, to make sure that all the accounts listed belong to you.
  • If you did not initiate a phone call, don’t give out any personal information or a credit card number over the phone, even if the caller claims to be from a legitimate company. Instead, get a name and number from the person calling and verify that the number and company are legitimate before calling back.
  • When online, make sure the website you are using is secure (look for the lock icon or the “s” in the “https” prefix in the Web address) before transmitting personal information.
  • Ensure that your firewall, anti-virus and spyware systems are up-to-date to protect personal information on your computer.
  • Don’t give out any personal information by e-mail, because it is not a secure method of transmission.
Prevention is key in dealing with identity fraud and now you have steps you can follow to protect yourself.

What steps do you follow to protect yourself from identity fraud? Have you been a victim?

Russel Lalovich
Office: (519) 966-0444
Cell: (519) 995-5620

Thursday, March 3, 2016

4 Things You Need to Know About Holdbacks At Closing

So you are preparing to close on an investment property, and an unforeseen problem arises just prior to the closing date. The problem can be a physical building issue, title related, or potentially connected to a tenant matter.

Whatever the problem - often times the parties, and more specifically the lawyers closing the deal - will likely discuss the prospect of a ‘HOLDBACK’ at closing.

What? – It’s the option of holding back a specified amount of the purchase amount, in order to ensure the Seller completes the work or remedies the problem which has arisen. The holdback amount is then agreed to by both parties and is released and ultimately paid when the problem is corrected.

Why? – It comes into play, as a means to correct a matter that in most cases was unforeseen at the time a deal has gone firm, and after all conditions were waived. If the parties agree (not always the case), it allows the deal to still close and keeps the Seller ‘incentivized’ to correct the problem as quickly as possible. After all, they will want to recover the holdback amount in order to realize the full purchase price.

Benefits? – Holdbacks primarily benefit the Buyer, as it not only addresses the matter prior to closing, but it assumes the amount withheld would be able to correct the problem if the Seller chose not to. But again from the Seller’s standpoint, it does benefit them as it allows the deal to still close subject to the holdback – which often is a small percentage of the total purchase price.

Potential Problems – Firstly holdbacks are not a given or automatic, particularly if they were not included in the Agreement of Purchase and Sale. As such, the potential for resistance on the Seller’s part can arise and legally it is best to tread lightly (a.k.a. consult your lawyer). Holdbacks are a compromise after the fact with both parties in an agreement, otherwise you may still be contractually bound to close. Most often it depends on the scope of the problem and the holdback amount proposed.

As a final point, holdbacks should be ‘time-limited’, so the parties understand within what period of time the matter will be resolved. – 30/60/90 days. As this becomes a post-closing matter, best practice is always the ‘sooner-the-better’.

No HOLDBACKS here…… just a click/call away from discussing our latest investment opportunities here in Windsor-Essex.

Mark Lalovich
Office: (519) 966-0444
Cell: (519) 259-5434

Tuesday, March 1, 2016

5 Steps to Correcting Errors on Your Credit Report

After introducing credit reports last week and some of the issues to look out for, we are going to dig down further to discuss correcting errors on your credit report.

This can be a frustrating experience for anyone concerned but knowing the process can help.

Have you ever had a company double charge your credit card? Or ever had an unauthorized purchase? Or even a case of identity fraud? Sometimes these mistakes might not even be something you are aware of until you check your credit report.

Or if you aren’t in the practice of regularly checking your credit yet, you may become aware when applying for a mortgage/loan or you get a call from a creditor or collection company.

Here is the process for correcting errors such as this on your credit report:

1. Support your case
Gather receipts, statements and other documents related to your credit accounts. You may need them to prove your claim.

2. Contact the credit reporting agencies
Use their forms for correcting errors and updating information. Do this for both Equifax Canada and TransUnion Canada. Before the agencies can make any changes, they first need to check your claim with the lender that reported the information. If the lender agrees there is an error, the agencies will update your file. However, if the lender confirms the information is correct, the agencies will not make any changes. If your file is updated, some provincial laws require credit reporting agencies to send a revised copy of your credit report to anyone that recently reviewed it.

3. Contact the lender
You may be able to speed up the process by contacting the lender yourself about the error. Ask the lender to verify its files and provide the credit reporting agencies with updated information.

4. Escalate your case
Not satisfied with the results of the investigation? Ask to speak with someone at a higher level at the credit reporting agency or the lender. If the lender is a federally regulated financial institution, and it will not correct the error, ask for information on its complaint-handling process. The Financial Consumer Agency of Canada (FCAC) also has an online tool you can use to look up your institution’s complaint-handling process.

5. Add a consumer statement
If you still are not satisfied, ask the credit reporting agencies to add a consumer statement. This lets you provide details about an item on your credit report, using up to 100 words. It’s free of charge. Lenders and others who review your credit report may consider your consumer statement when they make their decisions.

Have you ever had any experience in correcting errors on your credit report? How was your experience?

Russel Lalovich
Office: (519) 966-0444
Cell: (519) 995-5620